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Delayed crisis plan raises stakes in euro crisis; Italy under pressure to get economy in shape
BRUSSELS (AP) ' True to form, European leaders on Sunday put off the tough decisions needed to save the continent from its debt crisis but promised that a comprehensive plan is still coming.
As they dawdled, the danger was rising in an already high-stakes game.
Leaders of the continent's richest countries had unusually stern words Sunday for Italian Prime Minister Silvio Berlusconi, because many fear his nation could be the next dragged into the debt crisis if it does not make major budget cuts quickly.
That would spell disaster: Europe has rescued three small nations ' Greece, Ireland and Portugal ' but cannot afford to rescue Italy, the eurozone's third largest economy. Analysts say leaders have to act now to eliminate the possibility of Italy's financial collapse.
For weeks it's been clear what the 17 countries that use the euro must do: reduce Greece's debt burden so the country eventually can stand on its own, force banks to raise more money so they can ride out the financial storm that will entail, and show that their European bailout fund is big and nimble enough to prevent larger economies from getting dragged into the crisis.
On Saturday, officials said the leaders were nearing agreement on slashing Greece's debts and strengthening the continent's banks, many of which are awash in Greek bonds.
But Sunday, the only solid detail to emerge from three days of intense talks was that banks will have to raise their capital buffers much faster than they had planned ' by the end of 2012, instead of 2019.
A European official said Saturday the banks would be forced to raise just over euro100 billion ($140 billion) more for their rainy-day funds, but leaders have not given an official figure.
Instead, at a series of news conferences Sunday, all they could do was promise to deliver big at their next summit, called for Wednesday.
"It is a comprehensive package, and the recapitalization of the banks, getting a lasting solution to the Greek debt and what we call the leveraging of the European Financial Stability Facility are the three main parts of that package," said EU President Herman Van Rompuy, who chaired the discussions of the 27 EU leaders. "We are confident that we will get an agreement on Wednesday."
Analysts who have seen this pattern for months couldn't help but be skeptical.
"By failing to agree on anything substantial today, EU leaders may have set themselves up for an even bigger fall," said Sony Kapoor, managing director of the Re-Define think tank. "They owe it to Europe to pull a rabbit out of the hat now, but this seems to be beyond them."
Part of the challenge is that European leaders are unable to decide on anything until everything is in place, since each piece of the puzzle affects the others. The value of Greece's bonds can't be slashed until banks are strengthened ' or at least have confidence they can get help from the rescue fund. But some countries are reluctant to strengthen the fund until they know there's a plan to bring Greek debt under control.
Banks ' which have already agreed to cut the value of their Greek bonds by 21 percent ' are already rumbling at suggestions that they might need to double or nearly triple those losses. But without reducing Greece's debt load, the whole plan does not work.
The eurozone also still needs to work out how to most effectively use Europe's bailout fund to make sure Italy and Spain don't see their borrowing costs spiral out of control, as happened with Greece, Portugal and Ireland.
Officials said leaders had reduced seven different proposals down to two options, which are not mutually exclusive. Both options would essentially use the European Financial Stability Facility to insure investors against a first round of losses on bonds from wobbly countries.
But before that can be done, those countries have to convince their partners in the eurozone that their weakness is only temporary and they can get back into shape soon.
German Chancellor Angela Merkel and French President Nicolas Sarkozy came out with particularly strong words for Italy.
"We made it very clear that Italy is a big and important partner for the euro area and that everything needs to be done to live up to this responsibility," Merkel told reporters after the two met with Berlusconi.
"Trust does not just come from a firewall," she added. "Italy has great economic power but Italy also has a very high overall debt level. And that was to be taken down in the coming years in a credible way."
The stern tone reflected the seriousness of Europe's problems, which have roiled financial markets in recent months and been blamed for slowing economic growth across the globe.
Worst off, of course, is Greece, which is reeling from repeated rounds of budget cuts, job cuts and new taxes that have sparked near-daily strikes and even riots. The country is looking at a fourth year of recession and unemployment has hit a record of 16.5 percent.
"Greece has proven again and again that we are making the necessary decisions to make our economy sustainable," Greek Prime Minister George Papandreou told reporters Sunday. "But it's been proven now that the crisis is not a Greek crisis. The crisis is a European crisis, so now is the time that we as Europeans need to act."
To ease the pressure, banks will be asked to accept much bigger losses on Greek bonds.
Austria's chancellor said the cut in the value of Greek government bonds will likely be raised "in the direction of 40 to 50 percent."
"A cut in the debt is the right step," Werner Faymann told the Austrian newspaper Wiener Kurier.
Despite massive budget cuts and reforms, a new report says Greece's economic situation is still dire and it could take the country decades to emerge from the crisis.
The eurozone has accepted that it will have to provide Greece with tens of billions of euros in extra aid ' on top of euro110 billion ($152 billion) granted in May 2010. But to keep a lid on that amount, banks must go far beyond a preliminary deal reached in July, in which they promised take a cut of 21 percent of their Greek bondholdings.
The near-consensus among eurozone countries that Greece's debt will have to be slashed is one of the reasons banks across Europe ' not only in the 17-country eurozone ' will be forced to shore up their capital buffers in the coming months.
To that end, Sarkozy said the EU will require banks to raise their capital buffers to higher levels by 2012 rather than the 2019 laid out under the Basel III banking rules.
Associated Press writers Gabriele Steinhauser, Raf Casert, Slobodan Lekic, Don Melvin and Elena Becatoros contributed to this report.